Currencies: What's Up With the Buck?

There is a brief respite in the powerful short squeeze that has fueled the dollar's dramatic recovery. The greenback which was nearly friendless a month ago now has many suitors. It is higher on the year against all the major currencies but the yen (~2.6%), the Norwegian krone (~1.6%) and sterling ~0.9%). It is virtually flat against the euro.

The contrast between the Federal Reserve, which is likely to confirm its intention to continue to gradually guide US rates higher later today, and the ECB, which sound more cautious than confident, and the BOJ, which continues to press hard and refuses to even discuss an exit. Then there is the Bank of England, where Carney, and in fairness, some soft data, once again yanked the football away as it was about to be kicked. A rate hike next week now would be more disruptive than standing pat.

With the euro straddling the $1.20 level, we note several technical levels converge in the $1.1920-$1.1935 range. There are many with long euro exposures that are trapped from higher levels by the speed of the move. The euro's recovery to $1.2030 brought in fresh selling. The dollar is knocking on JPY110.00. Above there we see initial potential into the JPY110.50-JPY110.65 area. Sterling is through the neckline of a possible double top (~$1.37), which should offer resistance now. It projects toward $1.30-$1.31 near the 50% retracement of the rally from the flash crash low (on Bloomberg) in October 2016. More immediately, support is seen near $1.3550, a retracement objective of the leg up since last November.

The Australian dollar has recovered from the brief push through $0.7480-$0.7500 area which had held last December. That put the Aussie at its lowest level since last June. It is possible that area corresponds to a neckline of a double top pattern (Sept 2017 and Jan 2018 ~$0.8100). If valid, the would suggest a measuring objective near $0.6850 or where it bottomed in 2016. While the other currencies are trending lower, the Canadian dollar has moved broadly sideways in recent days. With a couple of exceptions, the CAD1.2820-CAD1.2900 has contained the US dollar for the past seven-eight sessions. Asia's economic reports included Japanese auto sales, which rose (0.5%) for the first time since last September. South Korea reported higher April CPI (1.6% vs. 1.3% in March), led by food and transportation. The central bank targets 2%. The core rate, which excludes oil and agriculture, edged up to 1.4% from 1.3%. China's Caixin manufacturing PMI ticked up to 51.1 from 51.0. The market had expected a slightly softer report. New Zealand reported a drop in the unemployment rate (4.4% v. 4.5%), to a new nine-year low. The participation rate eased (70.8% vs. 70.9% and was initially 71%), and private sector wages slowed in Q1.

China's markets re-opened after a two-day holiday. The Shanghai and Shenzhen composites slipped fractionally, but the CSI 300 managed to eke out a small gain. An index of H-shares fell over 1%. The yuan declined by 0.5% and saw its lowest level in more than three months. The PBOC set the reference rate 0.44% lower, which is a little more than the market expected. Some observers seem to be seeing an implicit threat ahead of the talks with a team of senior US Administration officials, led by Treasury Secretary Mnuchin, and including Lighthizer and Navarro....